OVERSIGHT OF THE ELECTRONIC FRAUD
DETECTION SYSTEM RESTORATION ACTIVITIES HAS IMPROVED, BUT RISKS REMAIN

Issued on March 29, 2007

Highlights

Highlights of
Report Number:2007-20-052 to the
Internal Revenue Service Chief Information Officer.

IMPACT ON TAXPAYERS

The Electronic Fraud Detection
System (EFDS) is the primary information system used by the Criminal
Investigation Division to detect and stop fraudulent and fictitious claims for
refunds on income tax returns. During
Processing Year 2006, the EFDS was not operational, resulting in an estimated
$318.3 million in fraudulent refunds being issued as of May 19, 2006. The Internal
Revenue Service (IRS) has improved controls over the EFDS restoration activities
including executive governance and project management.As a result, project risks are being
identified and mitigation actions are being taken to ensure the EFDS is
implemented and fraudulent refunds are stopped during Processing Year 2007.

WHY TIGTA DID THE AUDIT

This
audit was initiated to determine whether the IRS adequately monitored the
contractors’ development efforts in 2006 to ensure a system was delivered in
time for the 2007 Filing Season.

In January 2006, the IRS planned to launch a new version of
the EFDS application after failing to implement it in January 2005 because of
system development problems.However,
the IRS and its contractors were unable to launch a web-based version of the
EFDS to prevent fraudulent refunds during Processing Year 2006. On April 19, 2006, all system development
activities for the web-based EFDS were stopped, and all efforts were focused on
restoring the client-server EFDS for use in January 2007.This is a follow-up to a prior TIGTA audit, The Electronic Fraud Detection System
Redesign Failure Resulted in Fraudulent Returns and Refunds Not Being
Identified (Reference Number 2006-20-108, dated August 9, 2006).

WHAT TIGTA FOUND

The IRS has improved controls over the EFDS
restoration activities including executive governance and project management.

The IRS
recently issued a contract to the Computer Sciences Corporation (Contractor) for
an estimated amount of $3,080,004 for restoration work to be performed from
November 1, 2006, through February 24, 2007.The contract included a cost
sharing agreement not to exceed $3,080,004 as an equitable adjustment amount to
compensate the IRS for the cost to restore the client-server EFDS.However, the agreement does not include a
provision that would refund the unused
equitable adjustment to the IRS, and
the cost sharing commitment is exclusively related to delivering the
client-server EFDS in January 2007. Based
on our review of the tasks required to complete the project,
it does not appear the Contractor has $3,080,004 worth of work remaining on the
restoration project.The EFDS Executive
agreed with this conclusion and stated the Contractor has verbally agreed to
work on two application changes unrelated to the restoration work to ensure the
IRS will receive the $3,080,004 equitable adjustment.However, the contract states the Contractor’s
cost sharing commitment is exclusively related to delivering a client-server-based
EFDS and will not apply to any Federal Government-directed scope
increases.Therefore, the IRS may not
receive the entire equitable adjustment.

WHAT TIGTA RECOMMENDED

The
Chief Information Officer should work with the Director, Procurement, to ensure
the IRS receives all of the $3,080,004 equitable adjustment from the Contractor.

In
their response to the report, IRS officials agreed with the recommendation and
prepared a modification to the task order to ensure the IRS receives the full
equitable adjustment.The modification,
signed by the IRS and the Contractor on February 23, 2007, extends the base
period of performance and includes additional work within the scope of the cost
sharing agreement.

READ THE
FULL REPORT

To
view the report, including the scope, methodology and full IRS response, go to: